Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Proposed Rules 37709

1The Proposing Release defined the term ‘‘Year

2000 Problem’’ to include any erroneous result

caused by any computer software (i) incorrectly

reading the date ‘‘01/01/00’’ or any year thereafter;

(ii) incorrectly identifying a date in the year 1999

or any year thereafter; (iii) failing to detect that the

Year 2000 is a leap year, and (iv) any other

computer error that is directly or indirectly related

to (i), (ii), or (iii) above.

2 17 CFR 240.17a–5.

3 15 U.S.C 78a et seq.

4Release No. 34–40162, (July 2, 1998) (‘‘Adopting

Release’’).

5These stages are: (i) Awareness of potential Year

2000 Problems; (ii) assessment of what steps must

be taken to avoid Year 2000 Problems; (iii)

implementation of the steps needed to avoid Year

2000 Problems; (iv) internal testing of software

designed to avoid Year 2000 Problems; (v)

integrated or industry-wide testing of software

designed to avoid Year 2000 Problems (including

testing with other broker-dealers, other financial

institutions, customers, and vendors); and (vi)

implementation of tested software that will avoid

Year 2000 Problems.

6The Commission refers members of the public

to the Adopting Release for more detailed

information about the reporting requirements and

Form BD–Y2K.

7Release Nos. 34–39724; IC–23059; IA–1704,

(March 5, 1998), 63 FR 12056 (March 12, 1998)

(‘‘Proposing Release’’).

8As proposed, each broker-dealer would have

been required to assert (i) whether it has developed

written plans for preparing and testing its computer

systems for potential Year 2000 Problems; (ii)

whether the board of directors, or similar body, has

approved these plans, and whether a member of the

broker-dealer’s board of directors, or similar body,

is responsible for executing the plans; (iii) whether

its Year 2000 remediation plans address all

domestic and international operations, including

the activities of its subsidiaries, affiliates, and

divisions; (iv) whether it has assigned existing

employees, hired new employees, or engaged third

parties to execute its Year 2000 remediation plans;

and (v) whether it has conducted internal and

external testing of its Year 2000 solutions and

whether the results of those tests indicate that the

broker-dealer has modified its software to correct

Year 2000 Problems.

9This point was echoed by a number of other

comment letters.

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 240

[Release No. 34–40164; File No. S7–7–98]

RIN 3235–AH36

Reports To Be Made by Certain

Brokers and Dealers

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed rule; request for

additional comments.

SUMMARY: The Securities and Exchange

Commission (’’Commission’’) is

reopening the comment period with

respect to its proposal that would have

required broker-dealers to engage an

independent public accountant to attest

to specific assertions included in the

broker-dealer’s report on Year 2000

compliance. The attestation by

independent public accountants was

one amendment to Rule 17a–5 under the

Securities Exchange Act of 1934

proposed by the Commission in Release

No. 34–39724 which was published in

the Federal Register on March 12, 1998

(63 FR 12056).

DATES: Comments should be received on

or before August 12, 1998.

ADDRESSES: Comments should be

submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange

Commission (‘‘Commission’’), 450 Fifth

Street, NW, Washington, DC 20549.

Comments also may be submitted

electronically at the following E-mail

address: rule=comments@sec.gov.

Comment letters should refer to File No.

S7–7–98; this file number should be

included on the subject line if E-mail is

used. All comments received will be

available for public inspection and

copying at the Commission’s Public

Reference Room, 450 Fifth Street, NW,

Washington, DC 20549. Electronically

submitted comment letters will be

posted on the Commission’s Internet

web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT:

Michael A. Macchiaroli, Associate

Director, 202/942–0131; Thomas K.

McGowan, Assistant Director, 202/942–

4886; Lester Shapiro, Senior

Accountant, 202/942–0757; or

Christopher M. Salter, Staff Attorney,

202/942–0148, Division of Market

Regulation, Securities and Exchange

Commission, 450 Fifth Street, NW, Mail

Stop 10–1, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

At midnight on December 31, 1999,

unless the proper modifications have

been made, the program logic in many

of the world’s computer systems will

start to produce erroneous results

because, among other things, the

systems will incorrectly read the date

‘‘01/01/00’’ as being the year 1900 or

another incorrect date. In addition,

systems may fail to detect that the Year

2000 is a leap year. Problems can also

arise earlier than January 1, 2000, as

dates in the next millennium are

entered into non-Year 2000 compliant

programs.

The Commission views the Year 2000

problem as an extremely serious issue.

A failure to assess properly the extent of

the problem, remediate systems that are

not Year 2000 compliant, and then test

those systems could endanger the

nation’s capital markets and place at

risk the assets of millions of investors.

In light of this, both the broker-dealer

industry and the Commission are

working hard to address the industry’s

Year 2000 Problems.1

In a companion release also issued

today, the Commission is adopting

amendments to Rule 17a–5 2 under the

Securities Exchange Act 3 that require

certain broker-dealers to file reports

with the Commission and their

Designated Examining Authority

(‘‘DEA’’) regarding Year 2000

compliance.4

II. Year 2000 Reporting Requirements

The amendments to Rule 17a–5

included in the Adopting Release

require broker-dealers with a minimum

net capital requirement of $5,000 or

greater to file the new Form BD–Y2K.

Part I of Form BD–Y2K is a check-thebox Year 2000 questionnaire. Each

broker-dealer that is required to

maintain net capital of $100,000 or

greater will also be required to file Part

II of Form BD–Y2K, which requires a

narrative discussion of its efforts to

address Year 2000 Problems.

Generally, Form BD–Y2K requires

each broker-dealer to discuss the steps

it has taken to address Year 2000

Problems. Each broker-dealer, among

other things, is required to (i) indicate

whether its board of directors, or similar

body, has approved and funded written

Year 2000 remediation plans that

address all mission critical computer

systems; (ii) describe its Year 2000

staffing efforts; (iii) discuss its progress

on each stage of preparation for the Year

2000; 5 (iv) indicate if it has written

contingency plans to deal with Year

2000 problems that may occur; and (v)

identify what levels of management are

responsible for Year 2000 remediation

efforts.6

III. Independent Public Accountant

Review

The Commission originally proposed

amendments to Rule 17a–5 7 that would

have required each broker-dealer to

have an independent public accountant

attest to several specific assertions

included in its second Year 2000 report,

now Part II of Form BD–Y2K.8 In

response to the Proposing Release, the

American Institute of Certified Public

Accountants (’’AICPA’’) commented

that the required attestation report

would be difficult for independent

public accountants to provide.9 The

AICPA said that some of the required

broker-dealer assertions are not

appropriate for accountant attestation

because the assertions are not capable of

reasonably consistent measurement

against reasonable criteria. The AICPA

stated that currently, there are no

established criteria related to Year 2000

remediation efforts, and that the lack of
37710 Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Proposed Rules

1 17 CFR 240.17Ad–18.

2U.S.C 78a et seq.

3Release No. 34–XXXXX, (XXXX X, 1998),

(‘‘Adopting Release’’).

4 17 CFR 240.17Ad–13(d). Generally, Rule 17Ad–

13(d) exempts the following transfer agents from the

rule’s annual reporting requirements: issuer transfer

agents, small transfer agents exempt under Rule

17Ad–4(b), and bank transfer agents.

established criteria would likely result

in significant variation in the

examination procedures performed by

independent public accountants and

thus reduce the usefulness of the

attestation reports. In addition, the

AICPA expressed concern that the

purpose and conclusions of the

attestation report could be easily

misunderstood. The AICPA was

primarily concerned that uninformed

users of the attestation reports would

place undue reliance on them.

The AICPA suggested that an ‘‘agreedupon procedures’’ engagement, instead

of an attestation engagement, would

more effectively meet the Commission’s

goals. Pursuant to such an engagement,

a broker-dealer would engage an

independent public accountant to

perform and report on specific

procedures designed to meet the

Commission’s objectives. This would

eliminate the variability of examination

procedures performed by independent

public accountants and thus increase

the consistency of the reports received

by the Commission. The AICPA’s letter

outlined elements of an agreed-upon

procedures report and offered to followup with the Commission staff regarding

the development of specific procedures

for a Year 2000 engagement.

In light of the above, the Commission

has deferred consideration of the

appropriate accountant’s review of Part

II of the second Form BD–Y2K that

broker-dealers with a minimum net

capital requirement of $100,000 or

greater will be required to file by April

30, 1999, reflecting the status of the

broker-dealer’s Year 2000 efforts as of

March 15, 999. Accordingly, the

Commission is reopening the comment

period to obtain additional views,

including commentary on the feasibility

and desirability of an agreed-upon

procedures engagement. The public file

(No. S7–7–98) contains the AICPA’s

comment letter received in the original

comment period, the Commission’s

Initial Regulatory Flexibility Analysis,

and will contain any subsequent letters

submitted for the Commission’s

consideration.

Dated: July 2, 1998.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–18294 Filed 7–10–98; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 240

[Release No. 34–40165; File No. S7–8–98]

RIN 3235–AH42

Year 2000 Readiness Reports To Be

Made by Certain Transfer Agents

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed rule; request for

additional comments.

SUMMARY: The Securities and Exchange

Commission (‘‘Commission’’) is reopening the comment period with

respect to its proposal that would have

required transfer agents to engage an

independent public accountant to attest

to specific assertions included in the

transfer agent’s report on Year 2000

compliance. The attestation by

independent public accountants was

one component of Rule 17Ad–18 under

the Securities Exchange Act of 1934

proposed by the Commission in Release

No. 34–39726, which was published in

the Federal Register on March 12, 1998

(63 FR 12062).

DATES: Comments should be received on

or before August 12, 1998.

ADDRESSES: Comments should be

submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange

Commission (‘‘Commission’’), 450 Fifth

Street, NW, Washington, DC 20549.

Comments also may be submitted

electronically at the following E-mail

address: rule-comments@sec.gov.

Comment letters should refer to File No.

S7–8–98; this file number should be

included on the subject line if E-mail is

used. All comments received will be

available for public inspection and

copying at the Commission’s Public

Reference Room, 450 Fifth Street, NW,

Washington, DC 20549. Electronically

submitted comment letters will be

posted on the Commission’s Internet

web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Jerry

W. Carpenter, Assistant Director, 202/

942–4187; Thomas C. Etter, Jr., Special

Counsel, 202/942–0178; or Jeffrey

Mooney, Special Counsel, 202/942–

4174, Division of Market Regulation,

Securities and Exchange Commission,

450 Fifth Street, NW, Mail Stop 10–1,

Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

At midnight on December 31, 1999,

unless the proper modifications have

been made, the program logic in many

of the world’s computer systems will

start to produce erroneous results

because, among other things, the

systems will incorrectly read the date

‘‘01/01/00’’ as being the year 1900 or

another incorrect date. In addition,

systems may fail to detect that the Year

2000 is a leap year. Problems can also

arise earlier than January 1, 2000, as

dates in the next millennium are

entered into non-Year 2000 compliant

programs.

The Commission views the Year 2000

problem as an extremely serious issue.

A failure to assess properly the extent of

the problem, remediate systems that are

not Year 2000 compliant, and then test

those systems could endanger the

nation’s capital markets and place at

risk the assets of millions of investors.

In light of this, both the transfer agent

industry and the Commission are

working hard to address the industry’s

Year 2000 problems.

In a companion release also issued

today, the Commission is adopting Rule

17Ad–18 1 under the Securities

Exchange Act 2 to require certain

transfer agents to file reports with the

Commission regarding Year 2000

compliance.3

II. Year 2000 Reporting Requirements

Rule 17Ad–18 requires new Form

TA–Y2K to be filed by each transfer

agents whose: (i) Appropriate regulatory

agency, as that term is defined by 15

U.S.C. 78(c)(34)(B), is the Commission;

but (ii) is not a savings association, as

defined in Section 3 of the Federal

Deposit Insurance Act, 12 U.S.C. 1813,

which is regulated by the Office of

Thrift Supervision. Part I of Form TA–

Y2K is a check-the-box Year 2000

questionnaire. Each transfer agent that

does not qualify for an exemption under

Rule 17Ad–13(d) 4 will also be required

to file Part II of Form TA–Y2K, which

requires a narrative discussion of its

efforts to address Year 2000 Problems.

Generally, Form TA–Y2K requires

each transfer agent to discuss the steps

it has taken to address Year 2000

Problems. Each transfer agent is

required, among other things, to (i)

indicate whether its board of directors,

or similar body, has approved and

funded written Year 2000 remediation

plans that address all mission critical

computer systems; (ii) describe its Year

2000 staffing efforts; (iii) discuss its